Question

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed)
a.Both projects have the same future value at the end of Year 4.

b.Both projects have the same value at Time 0.

c.Both projects are ordinary annuities.

d.Project Y has a higher present value than Project X.

e.Project X has both a higher present and a higher future value than Project Y.

Answer 1

Answer:

e. Project X has both a higher present value and a higher future value than Project Y.

Explanation:

The project X cash flows are higher in initial years than of project Y. The present value of project X cash flows will be greater than project Y. The time value of money of project X will be greater than Project Y.

The future value of Project X will also be higher than project Y because it has higher cash flows in earlier years. When future value will be calculated the project X will give the higher Future value than project Y.